Arab Spring: In Foreign Aid to Egypt and Tunisia, Questions Loom

As the international community prepares to deploy aid for Egypt and Tunisia's ailing economies, it faces the daunting question of how to do so without perpetuating the endemic corruption and government monopolization that helped to spark the Arab Spring.

The protests that toppled Hosni Mubarak and Zine el Abidine-Ben Ali in part reflected popular frustration with soaring unemployment and a system that concentrated economic clout in the hands of the government and a small network of connected elites. Western nations and international institutions are mobilizing assistance to help stabilize Egypt and Tunisia, whose economies have been ravaged by revolution and an exodus of tourists. But there is a balance to be struck between immediate aid and facilitating broader economic changes.

If you look at what lay behind the instability that was one of the sparks for the protests, the economic factors that lay behind it were a very high joblessness rate connected with a rather sclerotic private sector run by a few companies with very good connections to government, said Charles Kenny, a senior fellow at the Center for Global Development. There's a feeling that we need to move quickly, and yet some of these reforms by their very nature take time.

The Group of Eight at its annual meeting pledged $20 billion to foster democratization in Egypt in Tunisia, with leaders drawing parallels to Eastern Europe after the fall of the Berlin Wall. The World Bank has offered $6 billion to the two countries, and the International Monetary Fund has signaled it could extend as much as $35 billion to the region in the coming years, having already agreed on a $3 billion package with Egypt.

Most of that aid will come in the form of loans tied to reforms to make the societies more open and transparent - a deputy national security adviser to President Obama told Reuters that, It's not a blank check. It's in the context of overall reform programs. But such conditions can only go so far. Imposing overly rigid requirements for the aid risks compromising the spirit of self-determination underlying the Arab Spring.

The best thing is probably to just give the money to the governments and then encourage them to use it in ways that make sense and monitor it, said Frank Anderson, president of the Middle East Policy Council. History has shown that there's great sloppiness and opportunity for corruption when you give governments money, but attempting to manage the system ourselves has failed miserably in place after place after place.

The countries also have fraught histories with international monetary institutions, giving citizens reasons to be wary. An IMF structural adjustment program in the 1990's privatized large swaths of Egypt's textile industry, leading to massive layoffs of Egyptian workers as plants were sold off. The IMF offered sunny economic forecasts for Egypt and Tunisia shortly before they were engulfed by popular protests, and the World Bank lauded Egypt as a reformer.

The young people protesting associate the IMF and related international financial institutions with this corrupt and autocratic and illegitimate government, said Stephen Zunes, a professor of politics and Middle Eastern studies at the University of San Francisco.Privatization under the IMF tended to be these former state owned industries going into the hands of cronies of the government.

Still, nurturing the private sector figures to be a central goal of reform, both to loosen the government's grip on commerce and to provide work for the huge numbers of unemployed and often educated young people. Clare Lockhart, Director of the Market Building Initiative at the Aspen Institute, said promoting new small and medium sized businesses through mechanisms like enterprise funds, financers that can provide risk guarantees and measures to open access to credit should be top priorities. She cautioned against using too much of the aid to create government jobs that could disappear when money dries up.

What experience from other countries shows is that a very careful balance needs to be struck, because if you create expectations that down the road are not sustainable you're going to face instability, Lockhart said. Any jobs created from government subsidies, we need to recognize the risk.

While Mubarak and members of his inner circle are gone, many of the structures that governed Egypt are largely intact - the army, for example, whose reach extended to virtually every industry in Egypt, remains the de facto ruler of the country until elections are held. This poses a serious challenge to reform.

The business climate in Egypt has been so infused with this culture of corruption for so long and it's in almost every sector of the economy, said Stephen McInerney, executive director of the Project on Middle East Democracy. There's a balance that has to be struck between reforming the economic system so that the corruption that allowed a lot of these folks to flourish is eliminated or phased out, but at the same time you don't want these parties that have a lot of the wealth in Egypt to put their assets elsewhere or to flee.

There is a powerful incentive to encourage entrenched elites to support a program of economic reform: the prospect of wooing foreign investors who want to be sure their investments would be protected.

There's an effort to convince these governments that the better they do to decrease corruption and increase transparency the more private investors will feel comfortable in investing, McInerney said. That's a message that I think a lot of people in Egypt and Tunisia understand, the importance of cleaning things up in hope of attracting the outside investment they want to see.

For now, Egypt finds itself in a precarious position. Its stalled economy is contributing to a growing sense of unrest and discouragement, stoking fears that the country could veer back into violence - an Egyptian man told the New York Times that people in the neighborhood are talking about going back to the streets for another revolution - a hunger revolution. But Kenny rejected the idea that economic stagnation would reverse the gains of the revolution, noting the potential of a highly educated workforce to replicate the successful transitions made by post-Cold War countries like Poland and the Czech Republic.

The youth will remain restless if unemployment is very high but that doesn't mean we're going to return to an autocracy, he said. People weren't just demanding jobs or lower food prices. They were demanding democracy because they thought it was a good thing in its own right.